Filing Taxes as a Student After the Tax Cuts and Jobs Act

March 28, 2018 : Gil Charney

The Tax Cuts and Jobs Act (TCJA) itself is about 200 pages long and contains a myriad of new rules that affect every taxpayer in one way or another, some more than others. Groups impacted are individual taxpayers, corporate taxpayers, pass-through entities, self-employed individuals, tax-exempt organizations, citrus growers, even beer brewers.

Yes! The TCJA lowered the general tax rate on beer, which may be good news to beer lovers, some of whom may be in college. But even if some college students don’t like beer, they will be glad to know that the biggest changes in the TCJA that affect them are no changes at all.

That is, the following education-related benefits remain unchanged:

  • American Opportunity Credit (AOC)
  • Lifetime Learning Credit (LLC)
  • Tuition and Fees deduction (extended in Bipartisan Budget Act of 2018, not the TCJA)
  • Exclusion for interest on savings bonds used for college*
  • Exclusion for educational assistance programs*
  • Deduction for student loan interest*

*There had been an earlier House proposal to eliminate the last 3 items on this list, and to consolidate the credits into one. However, the final bill did not include these changes. And if you were wondering what that gust of wind was on December 22, 2017, it was not a winter storm, but the collective sigh of relief from many college students and their parents.

 

Saving for the future

There was one change to 529 accounts that has no impact on current college students. Specifically, 529 accounts can now be used to pay for qualified expenses in K-12 schools, including private schools and religious schools. However, while this sounds like an expanded benefit, one should note that a dollar removed from a 529 account to pay for tuition at an exclusive elementary school is a dollar not available for college expenses.

The tax benefits listed above can help mitigate the cost of attendance, with tuition amounting to an average of $16,000 for in-state tuition at a 4-year public university, to almost $39,000 for out-of-state tuition at such a university. And the tuition and fees of an exclusive, private university can exceed $60,000 (not to mention room and board, books, supplies, lab fees, and other fees associated with the cost of attendance).

So, bottom line – education tax benefits can definitely help, but financing college is a complicated equation with a lot of variables – scholarships, grants, student loans, part-time work, 529 account savings, family gifts, retirement and IRA distributions, and more. Of course, not every student or parent will have all of these to choose from, and certainly some sources are better than others. A grant or tuition waiver is a whole lot better than having to take money out of an IRA or retirement plan.

Let’s look a quick look at a few of the more common tax benefits, which by themselves are complicated enough.

 

Outlining the tax benefits

First, the most generous education tax benefits are the credits – the American Opportunity Credit and the Lifetime Learning Credit. Each credit reduces your tax liability dollar-for-dollar, as does any credit, but they differ in many ways, such as how the credit is calculated, who qualifies, what expenses qualify, and more. The maximum AOC credit is $2,500 per year per student (up to 4 years of college). The maximum LLC is $2,000, but there is no time limit for qualifying.

The Tuition and Fees (T&F) deduction is not as generous as a credit, but the deduction is “above-the-line” – not requiring the taxpayer who claims it to itemize deductions. The maximum T&F deduction is $4,000, which helps reduce your Adjusted Gross Income (AGI). Since AGI is used as a measuring stick for many other tax benefits, reducing AGI even by a little can help a lot.

529 accounts are savings accounts that allow owners to save for their own or a beneficiary’s qualified education expenses. After-tax funds contributed to the account can grow tax-free, and distributions made for qualified education expenses are also tax-free (including any earnings on the funds). Moreover, even though there is no federal tax benefit to contribute to a 529 account, many states allow residents to deduct contributions made to a 529 account.

 

Final thoughts

As for the tax reform impact on affording college, tax benefits are one small piece of the puzzle. However, before you pop open that bottle of beer to celebrate, understanding the rules will help you claim the education tax benefit(s) that reduce your taxes the most. You may qualify for one education tax benefit, but not another, so do your homework and get the biggest bang for your education buck.

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Gil Charney

Gil is the Director of Tax Law and Policy Analysis for The Tax Institute at H&R Block.